Gangs of America

Source: Gangs of America, by Ted Nace, 2003

Synopsis: The book begins with the personal story of the author, his publishing company, and their rise from a tiny company operating out of the author’s kitchen to a full-on corporation. Following that growth and his exit from the company, Nace began asking questions about that process. What is a corporation? How did corporations get so much power? Gangs of America is his attempt to answer those questions, among others. Unfortunately, this is a full on book, 307 pages, and I won’t have finished it by the time of this post. For the purposes of our class, we are to concentrate on the rights of the corporation as outlined by Nace. Note: if the rest of the book is as interesting as what I’ve read, I will have no trouble finishing it…eventually. Nace is an engaging writer.

Reflection: I struggled with this source, not because it is dry (it’s not) or because it’s not interesting (it is, very), but for the following reasons: “corporation” is a legal entity and, despite my being a student for the better part of a decade, my education has never strayed toward the law; for better and worse, the U.S. economy is a very corporation-centric, capitalistic system; we don’t know if that system is sustainable; the latter may be the most important consideration of this class; and finally, all the aforementioned mean I’m left with more questions than answers. These include but are not limited to the following (Note: These were posed by Dr. Keuhl in response to a plea for help from me):

1. What is the motivation for forming a corporation? What does it offer to a business?
2. What is the motivation for society to offer a corporate legal designation?
3. What is the relevance of separating corporate ownership from management?
4. What is the relevance of giving corporations (nonbeings) the rights of citizens?
5. What is the relevance of restricting the liability of corporate owners (shareholders)?
6. What is the relevance of allowing corporations to cross jurisdictional boundaries and sectors?
7. What is the relevance of allowing/encouraging unlimited growth and even market dominance?
8. Are corporations a necessary part of the free market? Or do they act in ways that lead to market failure?
9. Are there incentives in the corporate rights that lead corporations to behave in unsustainable ways?

I started by defining corporation. According to the American Heritage College Dictionary (one of the best high school graduation presents you could give), a corporation is “a body that is granted a charter legally recognizing it as a separate legal entity having its own rights, privileges, and liabilities distinct from those of its members.” Other sources echoed this, and the significance of incorporating became clearer. At the most basic level (the level at which I am most likely to understand legal concepts), the corporation serves to protect its members, and to balance the interests of those members, which might include stakeholders, management, creditors, shareholders, employees, and clients. A key concept is limited liability, that is, shareholders in the corporation can lose their investment, and employees can lose their jobs, but none can be held personally responsible for debts incurred by the corporation.

This understanding gave me pause. Talk about having your cake and eating it too. My experience with investing is limited, but not nonexistent. As a graduate student paying my way by working on bicycles, I don’t have a lot of money. This forces me to think critically about what I do with it. I believe this forces me to invest intelligently and safely. I’ve never been faced with a situation in which I had the option of investing somebody else’s money, so what follows is speculation, but it seems if I’m not directly financially liable for what happens with that money, I won’t be as careful with it. I’m sure most corporations are responsible, but I don’t believe you will ever be as careful with somebody else’s money as you will be with your own. This simple understanding begs the question, if corporations have the capacity to harm, why do they exist?

Studying the evolution of anything, organism or otherwise, sheds a great deal of light on why it exists and why it exists in the form that we happen to find interesting. The first step in the evolution of corporations of interest to me was the need to pool resources that developed with the formation of trading companies in the 14th and 15th centuries. In those cases, pooling capital was both a question of common sense (sharing the cost of maintaining and/or establishing shared infrastructure) and necessity (longer voyages that would have been impossible for a single organization to fund). It was with this level of organization that the legal separation of the corporation from its members also emerged.

I find this interesting because it begins to explain why corporations exist, which in turn is explanation of how they benefit their members, society, or both. According to my admittedly limited understanding of these concepts, the benefit of corporations is that they facilitate growth (intellectual, financial, technological, etc.) that would not be possible, or would be possible on a smaller or slower scale, if left to the resources of smaller entities. Recent correspondence with a friend resonated with this. We were discussing the benefits of space exploration, whether or not we engaged in exploration for tangible benefits, or because “it is there.” His very respectable answer was that governments fund exploration to aid in assessing costs and risks. Once those unknowns become know, private entities can decide if the payoff (whatever that may be) is worth those costs and risks. My understanding is that corporations play a similar role in our economy, taking on costs and risks that would be prohibitive for smaller entities. The scale of their existence is proof that, at least historically, this benefit outweighed the costs, be they financial, social, or otherwise. This is, at least partially, the most compelling answer to questions 1 through 3 above.

Questions 7, 8 and 9 above are possibly the most compelling in terms of sustainability. Superficially, unlimited growth is encouraged because competition breeds better products, lowers prices, and in general, benefits producer and consumer alike. The question of whether or not you can have a free market without corporations is a good one, but ultimately moot; corporations are unlikely to disappear. Finally, in response to question 9, the purpose of business and corporation alike is to make money by offering a competitive good or service, with emphasis on making money (there are examples of businesses functioning after they have ceased to produce any kind of an offering, albeit for a short time, but the business that ceases to make money disappears much more quickly). This alone is not unsustainable, but the modern emphasis is on growth, maximization of profit, and is addressed by the title of this blog. Infinite growth is unquestionably not sustainable. For how long can a business or corporation grow? I’m in danger of striking off on a tangent here, but one of the questions perpetually floating around discussions of financial sustainability is whether or not money is an adequate analog for resources. If we accept that there is no intrinsic value in anything, that resources are only worth what somebody is willing to pay for them, and that value is therefore subject to the economic laws of supply and demand, it is probable that resources will be squandered because we are paying attention, not to the resource, but to the money. I cite the punchline of an old joke: how can I be overdrawn? I still have checks. But, I digress…

The corporation itself may not be unsustainable, but if the corporation exists in order to maximize profits regardless of the cost, be it financial, environmental, social, or otherwise, then the behavior of the corporation (or business, or individual for that matter) is not sustainable.

This is where I must leave this for now, which is regrettable. I will try to revisit “Gangs of America” in the future, as it explores so many of the issues that underlie questions of sustainable business practices.

Note: I am currently reading “Atlas Shrugged” by Ayn Rand for personal pleasure (i.e. not for school), and the juxtaposition is an interesting one. Rand is probably the best known proponent of free market capitalism, but I wonder what she would think of today’s idea of the free market and corporations. Her characters represent the ideals of ruthless capitalism, but they would not sacrifice the quality of their offerings for the sole reason of maximizing profit. In that quality, there is a “conscience” that is lacking in too many of today’s individuals, businesses, and corporations. In my reading, the country is being brought to its knees under the oppression of government regulation, a scenario Rand depicts in such a way as to make government regulation seem completely without merit, but her lead characters are also unwilling to influence the government in their own best interests. Modern corporations certainly do not have this reservation. There must be some balance between government regulation and the influence of big business on government, especially in light of recent legislation, but again, I digress…